Katapult Holdings, Inc.

Ladies and gentlemen, good morning and welcome to the Catapult Holdings Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Cull, Head of Investor Relations at Catapult Holdings. Please go ahead.

Welcome to Catapult's second quarter 2023 conference call. On the call with me today are Orlando Zayas, Chief Executive Officer, Nancy Walsh, Chief Financial Officer, and Derek Medlin, Chief Operating Officer. For your reference, we have posted materials from today's call on the investor relations section of the Catapult website, which can be found at ir.catapultholding.com. I would like to remind everyone that this call will contain forward-looking statements based on our current assumptions, expectations, and beliefs regarding our future financial performance and results, which are all subject to significant risks and uncertainties. These forward-looking statements should be considered in conjunction with cautionary statements contained in the earnings release and on Form 10-Q for the quarter ended June 30, 2023, as well as the subsequent periodic and current reports the company files with the SEC. These statements reflect management's current beliefs, assumptions, and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements. The information contained in this call is accurate only as of the date discussed. Except as required by law, the company undertakes no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events, or otherwise. During today's discussion, the company will provide certain financial information that constitute non-GAAP financial measures under SEC rules. These non-GAAP financial measures should not be considered replacement for and should be read together with our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is included with today's earnings release and is available on the investor relations section of the company's website. With that, I will turn the call over to Orlando.

Thank you, Jennifer, and welcome to Catapult. We're happy to have you here to lead our industrial relations program, and I know you're looking forward to getting to know our shareholders. Thanks also to everyone joining us today. We're excited to share our progress and hear your feedback, so I'll jump right in. During the second quarter, our team worked hard and continued to lay the foundation for profitable growth. This focus, coupled with ongoing demand for lease-to-own products for underserved, non-prime consumers, who are often left behind by traditional financing options, led to another quarter of strong financial and operating results. In short, we had another good quarter. Year over year, gross originations were up 18% to $54.7 million, and revenue grew 2.9% to $54.6 million. It's worth noting that gross originations have grown year over year, for three consecutive quarters, and we are grateful for our team's hard work that is allowing us to deliver these strong results. With the strength of our top-line results and lower cash operating expenses of $9.6 million, our adjusted EBITDA improved to a loss of $280,000. As I've mentioned before, more than 30% of American consumers do not have access to traditional financing options. Remarkably, approximately 37% of the adult U.S. population would not be able to cover a $400 emergency expense without assistance. And based on recent reports, we believe this number will continue to grow. With these dynamics, Caterpillar continues to have a compelling opportunity to put our innovative needs-to-own platform to work for these consumers. Our mission here at Catapult is to help this underserved community gain access to the durable goods they need when they need them, while simultaneously helping our merchant partners expand their reach to this growing base of engaged and loyal customers. It's a win-win for both our key stakeholders. Our dedication to doing the right thing for all of our stakeholders has not only led to an improving financial trajectory, but also allows us to sustain industry-leading net promoter scores from our customers. As of the end of the second quarter, our net promoter score was a strong 64. Before I get to the update on our progress against our strategic pillars, I want to reiterate our growth strategy. We have two basic goals. To grow our merchant base and to grow our customer base. And to do both profitably and simultaneously. Let me explain how we're evolving our approach to achieve these goals. To date, we have been primarily focused on building our merchant base. But we are also well positioned to expand our customer base. For example, we are growing consumer engagement with our mobile app featuring Catapult Pay, providing what we believe are undeniable benefits to our customers and enhancing and deploying our technology capabilities across the business. This is creating more avenues for growth outside of just direct integrations with merchants. On one side, we are growing our business by being a unique channel solution for our merchant partners that helps expand their businesses. This, in turn, has allowed us to expand the categories of durable goods that consumers can shop for. They can now use catapult lease-to-own products to shop for just about any durable good you can imagine. On the other side of our business, we're driving demand by building consumer awareness, consideration, and engagement through our expanded mobile capabilities and features and targeted marketing efforts. We feel confident that we're creating a flywheel that unlocks both greater value for our merchant partners and enhanced experience for our loyal customers, and that this will be the engine that powers our ability to achieve these three strategic pillars. So now let me walk you through the progress we've made on each pillar during the second quarter. Our first pillar is all about our merchants. Quite simply, we need to deepen our existing merchant relationships and enter into new ones with merchants that offer even more products consumers want. To do this, we are executing in three key areas. Extending current direct integration merchant relationships, adding new merchants to our direct integration pipeline, and leveraging catapult pay to include more merchants. Let's talk about expanding our relationships with merchants that are already directly integrated with Catapult First. At a high level, we are looking for more data-driven ways to drive business for our merchants. Some of the opportunities we are exploring include optimizing our offer pages and highlighting the lowest cost payoff options to our consumers. As we continue to build an even better understanding of what consumers are interested in, we believe we are able to leverage special events, targeted advertising, and new promotional strategies to drive on. Although we are testing and learning with these opportunities, we are seeing them gain early traction with our largest merchant, Playfair. Take rates, conversion, customer flow, and close rates remain healthy. And recently, Wayfair has begun to streamline their lending process and partners, and Catapult has emerged as a preferred partner for this important merchant. We believe that this ongoing strong performance with Wayfair demonstrates the value that we can bring to merchants. We're also working to add new merchants to our direct integration pipeline. With direct integrations, we have shifted our go-to-market efforts to larger enterprise merchants that have a robust install base of customers where we can keep our customer acquisition cost low. In addition, we want to partner with large retailers that will help Catapult diversify products consumers can shop for using our unique lease-to-own model. We believe, over time, a more diverse offering will be a driver of consumer engagement, turning our platform into a true shopping destination. During the second quarter, we launched and signed contracts for new direct integrations with merchants spanning a variety of retail categories, including our newest, Casper, a leading omnichannel mattress company. The integration with Casper will be both online and an in-store integration. It's important to note that while we certainly expect direct integrations to remain an important driver for us, it's not our only path of profitably scaling our business. We are also moving to diversify our revenue stream with other channel drivers. Let's start with a quick update on one of our newer growth drivers, Catapult Pay. As a reminder, Catapult Pay is a feature in our app. It's a virtual one-time card that consumers can use for shopping at online stores in the U.S. Each time a customer uses Catapult Pay, we create a unique card number that can be used at the store's checkout. We believe our Catapult Pay feature will become a powerful tool for both merchants and consumers. For merchants, it helps extend their customer base with a new cohort of engaged and loyal shoppers who previously did not have the purchasing power to shop with them. This translates into incremental sales and lower customer acquisition costs for our merchants. For consumers, it gives them the freedom to easily shop for durable goods with a variety of key retailers, putting purchasing power for the items they need within reach at fair and transparent terms. We believe both the merchant and the customers will benefit from this easy-to-use technology. So far, we have a growing list of merchants on Catapult Pay, including Home Depot, Amazon, Wayfair, Best Buy, Nestor, HP, Ikea, and Lull. We are pleased with the momentum we've been able to build for Catapult Pay, which was launched just last year. We're also exploring opportunities to leverage our data, proprietary technology, and industry know-how in new ways to drive growth and address the emerging needs of our merchants. Over the long term, we expect our offerings to include a diverse set of products that can address specific merchant needs, meet customers wherever they are shopping, and drive growth for Catapult. The second pillar is focused on consumers, bringing new consumers to our network and broadening our relationships with those who already know Catapult. Let's start with our efforts in marketing and consumer engagement. We are taking an increasingly data-driven approach to both and are laying the foundation for new and more targeted marketing programs that leverage data science. For example, we are adopting a new marketing platform that we believe will enhance our customer target effort, allowing us to have more seamless and dynamic conversations with customers across email, SMS, and in-app push notifications. we believe we'll be able to do a better job of putting the right content in front of the right customer at the right time. This platform will allow us to be more responsive to consumer behavior and quickly take action based on how customers are engaging with Catapult. We are currently launching phase one of this program, email, and over the next 12 months, we expect to expand to a full suite of communication tools that will allow us to take our conversation with consumers to the next level. We believe these tools will allow us to better address the full spectrum of lifecycle marketing opportunities, from building awareness to consideration to purchase and repeat purchase. These strategic marketing investments will, first, allow us to stimulate consumer demand with more targeted efforts, Second, use our interactions with consumers to inform our customer segmentation data, which will allow us to create a better platform experience and drive customer engagement. And finally, leverage our engagement data to help drive home the value proposition we offer our merchants. These efforts will encourage those current direct merchants to engage in joint marketing campaigns and for those merchants not yet on direct integration to see the value of a partnership with us. Next, let's talk about how we're driving customer repeat rates. Repeat rate is defined as the percentage of origination for existing customers in any given quarter. With our mobile app featuring Catapult Pay, we've opened the door for our customers to access the products they need from high-quality merchants in a simple and easy way. This quarter, we continue to see strong repeat customer rates. In fact, approximately 51% of our customers are repeat customers. Repeat usage is a differentiator for Catapult and is powered by our focus on identifying consumer needs and driving high customer satisfaction. We believe our AI-powered technology, which allows us to quickly determine what goods are leaseable, is a key ingredient in our customer experience and driver of repeat purchases. If you just think about Amazon and Home Depot, they offer a lot of goods that we can't lease. Because of our technology, customers are able to determine up front what is leaseable and what is not. In addition, being transparent with consumers about pricing and online costs is a critical part of our value proposition. These characteristics, coupled with the fact that we don't charge any hidden fees and we have quickly been able to add more durable goods categories by bringing on larger retailers, creates a really great customer experience. will continue to look at opportunities to enhance our offering for consumers and believe that in doing so we can drive lifetime value of our loyal and engaged customers even higher over time finally our third pillar is really the foundation of which our business fits our innovative technology one of our core strengths is how adaptable and flexible our technology is the ease of use and workflow simplicity allows us to quickly address key merchant and consumer needs. From our user experiences, which we believe are best in class, to the speed at which we can deliver underwriting decisions, to our integration flows that allow us to launch more quickly with merchants, we believe our technology sets us apart. During the second quarter, we continue to see the benefits from the launch of Catapult Pay and our leading edge AI capabilities allowed us to continue to add large retailers to our app. Both of these are a testament to the strength of our technology team here at Catapult. Our tech strength is also accelerating our A-B testing capabilities. This will allow us to launch updates to our app and website experience that we believe resonate even more deeply with our consumers more quickly. For example, we are using A-B testing to test and learn the risk-based pricing model. In addition, we are leveraging our Agile technology platform to support our new targeted marketing programs and other B2C efforts. We've made a lot of progress during the first half of the year, and we remain focused on delivering the value to all our stakeholders. Now I'll turn the call over to Nancy so she can provide a review of our financial performance during the second quarter of 2023. Nancy?

Thank you, Orlando. I'm excited to talk to you today about our strong second quarter results, which exceeded our outlook, and to provide you with an update on the third quarter. As Orlando has outlined for you, our operating priorities are centered around executing against our three pillars, which we believe will drive revenue growth and sustain profitability. With that, let me provide you with some of the financial highlights for the second quarter of 2023. Gross originations increased 18% year-over-year to $54.7 million. Increased originations were driven by strong performance through our direct merchants and mobile app channels, as well as the continued expansion of merchants on our mobile app marketplace featuring Catapult Pay. Catapult's portfolio of direct merchants provides a funnel of new customers to drive gross originations at minimal customer acquisition costs. As a reminder, gross origination trends are a leading indicator of future revenue streams. A percentage of revenue is realized in the quarter in which the gross origination occurs and increases cumulatively over the next four quarters. During the quarter, approximately 51% of our originations came from existing customers. This is up from 47% in Q1 and demonstrates continued strong engagement through our mobile app. We are also seeing that customers who engage with our catapult pay feature tend to be higher quality customers. They repeat purchase faster, tend to cross-shop across merchants and categories more frequently, and ultimately we expect them to have a higher lifetime value. While we are still in early days since Catapult Pay was just launched late last year, we are very excited about its potential with both consumers and merchants. Revenue increased 2.9% year-over-year to $54.6 million and reflects the trends driving gross originations that I just mentioned, as well as the strong volume performance we saw in the first quarter. Write-offs as a percentage of lease revenue increased sequentially to 9.2% from 8.4% in Q1 2023. This sequential increase was due to seasonal patterns and trends. As a reminder, in 2022, we saw lower write-offs and impairment charges related to our 2021 gross originations due to COVID and other stimulus-related repayment patterns that year. With this tailwind, Q2 2022 write-offs as a percentage of lease revenue was 6.4%. Our long-term target for write-offs as a percentage of revenue is eight to 10%. And our results this quarter remain comfortably within this range. We lowered our overall operating expenses by 13.3% compared with Q1, 2023 and 16.5% year over year. These reductions were driven by the operating leverage benefits we are achieving as a result of the expense reduction initiative we put in place in late 2022. Excluding underwriting fees and servicing costs, which are variable, and depreciation and non-cash stock-based compensation expense, our fixed cash operating expenses were $9.6 million, down 24.6% compared to last year. Based on our top-line outperformance and the structural and sustainable benefits we are realizing from our focus on operating efficiencies, we were able to improve our adjusted EBITDA performance substantially. For the second quarter, we recorded an adjusted EBITDA loss of $280,000, which was a $5 million improvement compared with the $5.3 million loss we reported in the second quarter of last year. As of June 30, 2023, we had cash and cash equivalents of $38.2 million, and we feel comfortable that our cash position and our credit facility provide us with the resources we need to support our growth strategy. The company continues to navigate an evolving macro environment. While there are tailwinds such as better inflation data and a reduced likelihood of a recession in the U.S., interest rates remain elevated, lending standards are tight, and the potential resumption of student loan repayment requirements may impact our poor consumers' ability to take on new leases. This mixed bag of economic indicators has led to continued economic uncertainty. That said, lease-to-own solutions have historically benefited from periods of shrinking prime credit availability. Based on this macro outlook and our operating plan, for Q3 2023, we expect to deliver a 14% to 16% year-over-year increase in gross originations, which would be the fourth consecutive quarter of year-over-year growth. This outlook is driven by our expectation that macroeconomic conditions and our collections trajectory remain consistent with the first half of the year, and that we see a positive impact from the new marketing initiatives we discussed today. We also expect revenue to grow 5% to 7% year-over-year compared with the second quarter of 2022. Lastly, we expect our adjusted EBITDA performance to improve meaningfully compared with the third quarter of last year, reflecting our revenue growth expectation and further reduction of our fixed cash operating expenses. We expect fixed cash OPEX to be down approximately 25% year-over-year. In summary, we delivered strong gross origination revenue growth, and improved profitability in the second quarter and the first half of the year. We have a healthy balance sheet that provides us with the financial room we need to fund a growing pipeline of originations and to invest in our growth opportunities while enhancing our adjusted EBITDA. And we remain focused on continuing to execute our strategic initiatives to drive growth and profitability. I would now like to turn the call over to the operator to open the line for Q&A. Operator?

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Josh Sigler with Cantor Fitzgerald. Please go ahead.

Yeah, hi. Good morning. Thanks for taking my question today. So, first of all, I'd like to talk about Wayfair. So, in the quarter, Wayfair represented 56% of gross originations, which was the highest percentage since 2Q22. Now, as you expand Catapult Pay, do you expect further diversification away from Wayfair as we head into 2024?

Hi, Josh. It's Orlando. Yes, we do. Wayfair had a good quarter, good half of the year, quite frankly, when they had their way day. And we've improved the partnership with them where we're driving more repeat business back to them. They're on our app on Catapult Pay as well. So, you know, we're real pleased that, you know, they continue to be a good part of our business. But, yes, we believe that Catapult Pay and some of the other retailers that we added will start diversifying the portfolio more.

Great. Thanks, Orlando. Appreciate that. And then, you know, you guys were just talking about how your EBITDA guide implies further reduction in cash op-ex. I was wondering if you could elaborate a little more on the leverage in this business and your ability to maintain these lower OpEx levels in the future. Thanks.

Hi, this is Nancy. Thanks for the question, Josh. You know, it really comes down to optimizing our efficiencies and productivity. So I don't think of it as just cutting costs and then at some point in the future we're going to have to build them back up again. As you remember, 2022 was an investment year. that we've seen tremendous return on those investments that we made in terms of our app and Catapult Pay. This year, we've continued to focus on optimizing the expenses, which will be sustainable going forward.

Got it. Thank you very much.

Thank you. Our next question comes from the line of Vincent Cantonic with Stephens. Please go ahead.

questions. First question is sort of the industry competitive landscape. I think it's impressive that you've grown this quarter and are calling for growth in the third quarter when the other least owned players in the industry are still shrinking year over year. I was wondering if you were able to compare and contrast sort of what's driving Catapult's growth and that double digit year over year growth versus maybe what we're seeing in industry. That'd be helpful. Thank you.

Thanks for the question, Vincent. Nice to hear from you again. You know, when we look at our business versus our competitors, it really is about the efficiency of e-commerce. And I think that the merchants on e-commerce didn't suffer for some of the store traffic. I think they all represented that store traffic was down across the board. And then if you add to that, you know, working better with our merchants, you know, Wayfair, for example, streamlined the number of players they have in their waterfall flow. We also, you know, continue to work with them to drive, you know, improve business, like I just mentioned with Josh. And then, you know, Catapult Pay, obviously, and adding some direct, we added Casper, which was a competitive win. And, you know, the retailers that we're talking to like the fact that The ease of use, the transparency, the way we treat our customers kind of matches their values, and that's how we win, and that's how we won Casper. And then if you look at catapult pay, you know, we've got – you can get about any durable good that you can imagine. So we're, I think, in the early days on that one with getting our current customers to go back, shop at multiple retailers, including Amazon. And they can find stuff that maybe we didn't have a merchant before. So we're pretty excited about that. And I think the next step is to really start growing our other partnerships where we can drive more customers in, not just from a merchant perspective, but maybe a related industry where we can do that.

Okay. Thank you. And then I guess as part of – so you see a lot of waterfall data. Are you seeing – I guess maybe not competitors, but like those who provide credit maybe at the higher levels tightening a bit. I'm just sort of wondering if there might be any volume opportunities from that.

Yeah, we, you know, I actually mentioned that I think after our first quarter call that we started to see tightening back in October. And because we are pretty much 95% waterfall, you know, we can see that almost directly when it starts to happen. And it seems like it's leveled out. It doesn't seem to be going deeper. I think the tightening has happened, and we're just taking advantage of that, and that's helping, obviously, drive our growth because we're seeing some better customers. But I don't see it tightening much more.

Okay, great. And last one for me. So with the growth you're generating and over 50 million GMV and growing from here, Just kind of looking at your balance sheet, looking at under $40 million of cash and thinking about kind of your balance sheet position, anything that you need to do there to kind of fund your growth? Thank you.

We are well positioned between the cash that we have on the balance sheet as well as the revolving letter, revolving credit facility that we have to sustain our growth going forward. We have options to accordion that facility. and we're just very comfortable with the liquidity position and that that can continue to foster the growth that we have.

Okay, that's great. Perfect. Thanks very much.

Thank you. Thank you. Thank you. Has there been no further questions? I would now hand the conference over to Orlando Zayas for his closing comments.

Thank you. And thanks so much for following our progress. We're very excited not only by our results and the opportunities, but also by the positive impact that our business success can create for people in the United States. Many of us can't imagine not having access to credit to pay for durable goods that most of us take for granted. We're proud of the work that changed this landscape and grateful that you, as our shareholders, are on this journey with us. I look forward to updating you in the next quarter on our continued progress. Thank you very much.

Thank you. The Conference of Catapult Holdings has now concluded. Thank you for your participation. You may now disconnect your lines.